Euro: EU Calls For 'Banking Union,' Portugal To Inject More Than EUR 6.65B

The Euro climbed to a high of 1.2465 as Spanish Prime Minister Mariano Rajoy called for a 'banking union' in Europe, and it seems as though the EU will increase its push to recapitalize the banking system through the permanent bailout fund as the group struggles to restore investor confidence. At the same time, French Finance Minister Pierre Moscovici voiced his support to increase the scope of the ESM, stating that it may be up for discussion at the next EU Summit on June 28-29, while European Central Bank board member Ewald Nowotny said the current move is the 'right' idea, 'but will need significant time to be realized.'

In response, a spokesman for German Chancellor Angela Merkel argued that 'it's up to national governments to decide whether they want to avail themselves of aid from the backstop and accept the conditions linked to it,' and we are likely to see increased pressure on the European Central Bank to ease policy further as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support. Meanwhile, Portugal announced it will inject more than EUR 6.65B into its three-largest banks amid the ongoing turmoil in the financial system, but the growing threat for contagion will continue to dampen the outlook for the region as European policy makers try to buy more time. Although the ECB is widely expected to keep the benchmark interest rate at 1.00% in June, market participants are pricing a 17% chance for a 25bp rate cut later this week, and we should see the Governing Council carry its easing cycle into the second-half of the year as the fundamental outlook for the region continues to deteriorate. As the relative strength index on the EURUSD climbs back from oversold territory, the pair looks poised for a correction, but we are waiting to see a break and a close above the 10-Day SMA (1.2497) to see the rebound gather pace.

British Pound: Risk-Trends To Drive Prices Amid U.K. Holiday

The British Pound pared the decline from Friday despite the market holiday in the U.K., and the GBPUSD may continue to track higher over the next 24-hours of trading as market participants increase their appetite for risk. Although the Bank of England is schedule to meet later this week, we may see the central bank refrain from releasing a statement as the Monetary Policy Committee is widely expected to preserve its current policy in June, and the sterling may face sideways price action ahead of the meeting minutes due out on the 20th as market participants continue to see more quantitative easing in Britain. Even though the GBPUSD remains oversold, we need to see the RSI climb back above 30 to see a meaningful correction, and the pair may continue to come up against the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270 as it searches for support.

The greenback continued to lose ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,210, and the reserve currency may continue to consolidate in the days ahead as it appears to have carved a short-term top coming into June. In light of the dismal developments coming out of the world's largest economy, Fed policy makers may continue to strike a cautious tone for the region, and the Beige Book on tap for later this week may highlight a softer outlook for growth and inflation amid the ongoing slack in private sector activity. Nevertheless, as the recovery gets on a more sustainable path, we should see the FOMC move away from its easing cycle, and the central bank may sound more hawkish later this year amid the stickiness in underlying price growth.